Markets
Opportunity Amid Policy Shifts and Innovation
Feb 2025
Recent weeks have seen markets speculating on the new administration’s potential policy direction—spanning trade, immigration, fiscal reforms, deregulation, and DOJ actions—each with broad implications across sectors. While past promises of growth and deficit control often lacked substance, today’s advances in disruptive technologies could genuinely support both. Monetary policy provides some reassurance with expected stability at the Fed and potential rate easing if inflation cooperates. Against this backdrop, we anticipate a favorable environment in 2025, with deregulation potentially unlocking value in existing holdings and strong positioning for emerging opportunities, especially in AI, as the year unfolds.
Market Confidence Returns as Volatility Eases
Feb 2025
Investor sentiment improved in November as uncertainties around rates, earnings, and the US elections eased, leading to strong gains across equities and fixed income. Volatility dropped sharply, while major indices posted robust returns. Fixed income markets saw spread tightening across high grade, high yield, and leveraged loans, with healthy issuance in the loan market and modest activity in others. Inflows into high yield and loan funds continued, marking several consecutive months of positive momentum. Default and distressed activity remained manageable, with defaults concentrated among smaller issuers, and forward-looking default expectations remained moderate.
Market Rebound Drives Broad-Based Gains in January
Jan 2025
Markets rebounded in January after a weak close to 2024, with strong gains driven by broad-based performance across sectors. Siemens Energy, Meta, agriculture, and semiconductors saw notable strength, while Fluence, Warner Brothers, and some energy holdings underperformed. The ongoing earnings season has seen a majority of S&P 500 companies report, with several key holdings meeting or exceeding expectations, while additional updates are expected in the coming days.
Strong Start Amid Fed Signals and Earnings Optimism
Jan 2025
Financial markets opened 2025 on a strong note, supported by a solid earnings season and a more measured tone from the Federal Reserve. Equity markets posted gains, with major indices rising, while fixed income also saw positive returns. US Treasury yield curve differentials remained stable, and commodities such as crude, gold, and copper advanced, while natural gas declined. Investment-grade and high-yield credit markets experienced active issuance, with notable deals from major corporate names. High-yield and leveraged loan inflows were robust, with leveraged loans seeing their highest fund flows in two years. Default and distressed activity in high-yield and leveraged loans reached their lowest levels since late 2022, with default rates easing further. Banks maintain varying default projections for year-end, with expectations remaining relatively low.
Market Volatility and AI Ecosystem Resilience Amid Fed Caution
Dec 2024
The incoming administration’s policy agenda for 2025 presents a mix of opportunities and challenges, including potential benefits from lower regulation, tax cuts, and a focus on AI and US manufacturing, alongside risks like trade tensions, higher deficits, and inflation. While markets face uncertainty over these policies, secular trends like the expansion of AI, US LNG growth in Europe, and continued electrification from EVs and data centers are likely to persist. The Fund is poised to capitalize on these trends, with its AI-focused holdings and defensive value-oriented investments providing flexibility to adapt to macro and policy shifts as needed.
Rising Default Trends Amid Fed Hawkishness
Dec 2024
Risk markets faced volatility in December as the Fed’s hawkish guidance alongside a rate cut triggered a spike in market uncertainty, reflected in a sharp rise in the VIX and mixed performance across equities, fixed income, and commodities. High-yield and investment-grade bond spreads showed modest changes, while leveraged loan issuance hit record levels. Fund flows were varied, with high-yield funds seeing outflows and leveraged loans experiencing inflows for the third consecutive month. Default and distressed activity surged, marking the highest levels since early 2023, with leveraged loan defaults notably elevated. Projections for 2025 point to higher default rates across both high-yield and leveraged loans, indicating ongoing caution in the credit markets.
Policy Shifts and Innovation Drive Optimism Amid Volatility
Nov 2024
Recent weeks have been marked by speculation over the incoming administration’s policies, including potential impacts on tariffs, fiscal efficiency, deregulation, and market oversight. On the fiscal front, plans to extend tax cuts, target GDP growth, and reduce the deficit hinge on leveraging disruptive technologies for economic and fiscal gains. Monetary policy provides some stability, with the Fed signaling gradual rate reductions if inflation remains controlled. These factors, combined with a deregulatory agenda, suggest a constructive market environment for 2025, with opportunities to unlock value across various sectors and capitalize on the next wave of AI-driven innovation. While near-term volatility is expected, the outlook for unlocking value and identifying new growth opportunities remains promising.
Eased Uncertainty Spurs Gains Across Equities and Fixed Income
Nov 2024
November brought robust gains for investors as uncertainties around rates, earnings, and the US elections eased. Equity markets surged, with significant gains across major indices, while fixed-income returns rebounded alongside tighter high-yield spreads and strong leveraged loan performance. The VIX plummeted, reflecting decreased volatility, and the US Treasury yield curve remained stable. Commodities saw mixed outcomes, with notable losses in crude, gold, and copper but a sharp rise in natural gas. Default activity moderated, with a slight uptick in loan defaults, though default rates for high-yield bonds and leveraged loans remained within manageable levels. Fund flows into high-yield and leveraged loans remained positive, signaling continued investor confidence in these sectors.
Market Implications of the Incoming Administration
Oct 2024
The remainder of 2024 is expected to be shaped by speculation about the incoming Administration’s policies, supported by a Republican-controlled Senate, House, and a conservative Supreme Court. Key policy shifts are anticipated, including deregulation, reduced constraints on M&A activity, increased hydrocarbon production, and diminished emphasis on ESG, particularly social and governance aspects. Trade tensions with China may escalate, and tariffs could influence inflation, challenging the Fed’s interest rate strategy. The Administration’s stance on the Paris Accord and clean energy remains uncertain, reflecting mixed priorities. Meanwhile, trade dynamics with allies may require a cautious “wait-and-see” approach. This evolving policy landscape is seen as a potential driver of market volatility and investment opportunities, with deregulation and sector-specific developments likely to unlock value in industries such as energy, technology, and media.
Volatility Rises Amid De-Risking and Mixed Performance
Oct 2024
October saw moderate de-risking across markets driven by a post-Fed rate spike, election uncertainty, and anticipation of earnings releases, leading to heightened volatility as the VIX surged. Equity markets experienced slight losses, while the fixed-income sector faced challenges, with high-yield spreads tightening but overall returns declining for investment-grade and high-yield bonds. Leveraged loans were a standout performer, benefiting from strong issuance and narrower spreads. Commodity markets saw mixed performance, with gains in crude oil and gold offset by declines in copper and natural gas. Default activity ticked up modestly, though high-yield and leveraged loan default rates remained relatively low, aligning with forecasted trends. Fund flows reflected investor interest in high-yield and leveraged loans, with positive inflows driven by active management and ETF dynamics.
Market Dynamics Shaped by Earnings, Geopolitics, and Strategic Opportunities
Sep 2024
October is set to be influenced by third-quarter earnings reports and early insights into the US election, but recent macro surprises, including China’s policy actions and a strong jobs report, are shaping market dynamics. The strong jobs data has raised questions about further rate cuts, while China’s economic measures have triggered a rally in Chinese stocks and reduced deflation risks. Additionally, geopolitical tensions in the Middle East could affect oil prices. At a company level, acquisitions in the lithium sector are reversing prior losses, and regulatory scrutiny on big tech continues to grow. Despite these uncertainties, there remain strategic opportunities, particularly in aerospace and defense, with a focus on long-term winners in sectors impacted by technological disruption.
Rate Cut Sparks September Gains Despite Growing Economic Uncertainty
Sep 2024
September saw positive returns driven by a long-awaited U.S. rate cut and optimistic remarks from Fed Chair Powell. However, rising macroeconomic concerns, including Middle East tensions, U.S. election uncertainty, and a port strike, led to increased market volatility. Fixed income benefited from falling interest rates, while commodities like natural gas, copper, and gold posted strong gains. Issuance in investment-grade and high-yield markets was robust, with narrowing spreads across asset classes. High-yield fund inflows continued for the fifth consecutive month, while leveraged loans saw outflows. Default activity moderated in September, and forecasts for high-yield and leveraged loan defaults were revised down by major financial institutions for 2024.
Strategic Outlook Amid Global Economic Uncertainty
Aug 2024
The markets are entering a typically volatile period as investors navigate uncertainties surrounding the upcoming November election and potential Federal Reserve actions amid a slowing economy. Overseas, China faces deflation concerns despite projected growth, impacting global commodity prices, while Europe continues to struggle with slowing growth, prompting policy rate cuts. Germany’s auto industry is at risk due to high costs and competition from cheaper Chinese exports. In the US, key sectors like housing are challenged by a lack of affordable supply, and lawmakers will soon need to address growing government debt and expiring tax legislation. Despite these uncertainties, strategic opportunities in various sectors remain.
Strong Gains Amid Rate Cut Signals and Rising Default Risks
Aug 2024
After a volatile start, August saw strong market performance as the US Fed signaled the potential for interest rate cuts. While some indices like the Russell 2000 declined, others such as the S&P and NASDAQ made gains, alongside a strong fixed income showing. Commodities like gold and natural gas performed well, while crude and copper faced declines. US high-grade and high-yield issuers remained active, though leveraged loan issuance hit a monthly low. High-yield fund inflows were positive, but leveraged loan funds saw outflows. Default and distressed activity increased, with rising rates in leveraged loans, as markets brace for further potential defaults.
Strategic Opportunities Amid Economic and Geopolitical Uncertainty
Jul 2024
Looking ahead, key events to monitor include the Federal Reserve’s interest rate policies in response to economic data, developments in China’s policy discussions, and ongoing fiscal and geopolitical risks. Despite market volatility and concerns about the Fed’s timing in adjusting rates, indicators such as jobless claims and PPI statistics suggest the economy is stabilizing, with inflation steadily decreasing. The current environment presents attractive opportunities in sectors like technology, energy, sustainable food production, and communications, with ongoing volatility expected to offer further tactical and strategic opportunities through the fall.
Volatility, Economic Shifts, and Rising Default Risks
Jul 2024
July started the third quarter of 2024 on a positive note for markets, despite extreme volatility in early August. The Federal Reserve held off on cutting rates at its July meeting but is expected to do so in September following weak labor market data. The VIX rose significantly, indicating increased market volatility, while the Russell 2000 outperformed other indices. Fixed income performed well, with significant gains across various JPM indices. The US Treasury yield curve saw a slight inversion compression amid a slowing economy, and most commodities, except gold, experienced losses in July. Corporate issuance remained strong, with notable activity in the investment-grade and leveraged loan markets. Default and distressed activity picked up, with several companies filing for Chapter 11, leading to a rise in leveraged loan default rates. Looking ahead, default rates for high yield and leveraged loans are projected to increase in 2024 and 2025.
Mid-2024 Market and Economic Outlook
Jun 2024
As we move into the second half of 2024, several macroeconomic and market developments could be significant. Chairman Powell’s recent testimony highlighted new concerns about a weaker jobs outlook alongside high inflation, signaling potential interest rate cuts. The Fed’s sizable balance sheet and ongoing high fiscal deficits complicate the rate outlook, with concerns about US government debt supply potentially being mitigated by AI’s impact on economic growth and pragmatic tax policies post-election. European elections suggest a shift to the left, raising questions about parallels with the upcoming US election. However, the US’s distributed policy power may lead to more balanced outcomes. Market valuation imbalances are notable, with the top five S&P 500 stocks valued much higher than the bottom 250, raising questions about AI’s role in the economy. Additionally, second quarter earnings and outlooks will be consequential to near-term market performance.
Strong Market Performance in Mid-2024 Amid Optimism for Rate Cuts
Jun 2024
Markets ended the second quarter and first half of 2024 strongly in June, driven by optimism for potential rate cuts and strong performance from major tech stocks, leading to reduced market volatility. The NASDAQ and S&P 500 posted gains, while small caps underperformed. Fixed income markets remained robust with positive returns, and the US Treasury yield curve inversion held steady. Commodities, particularly crude oil, gold, and natural gas, saw positive returns, though copper declined. Investment grade issuance was high, though spreads widened slightly, and high yield issuance was lower with modestly wider spreads. Fund flows for high yield and leveraged loans were positive, with significant inflows into ETFs. Default and distressed activities were minimal, with decreasing default rates and manageable risks, as projections for 2024 and 2025 default rates remain moderate.
Global Shifts and AI Advancements
May 2024
Recent events signal notable shifts in global economic and political landscapes. The Canadian and European Central banks have cut interest rates ahead of the US Federal Reserve, reflecting a slowdown in Western economies, while China shows signs of economic strengthening. Despite high interest rates, the US economy is performing well with strong job creation and positive CPI results. Political surprises in India, Europe, and Mexico indicate public dissatisfaction with the status quo. On the corporate front, AI development is advancing rapidly, with Microsoft introducing AI PCs. Blackstone’s CEO likens AI’s impact to the invention of electricity, emphasizing its transformative potential. Nvidia’s outstanding performance highlights the importance of AI-related investments, which are crucial to the broader digital economy.
May Market Rebound:
Earnings and Fed Signals Drive Gains
May 2024
May brought positive developments for investors as markets rebounded from April’s challenges, driven by strong earnings and signals from the Federal Reserve about potential rate cuts. Market volatility decreased, and major indices like the NASDAQ, S&P 500, and Russell 2000 saw significant gains. Fixed income markets also showed improvement, and the US Treasury yield curve remained inverted. Commodity returns were mixed, with crude oil declining while gold, copper, and natural gas increased. Investment-grade and high-yield gross issuances rose, with notable activity from major corporations. High-yield fund flows surged, and leveraged loan inflows remained robust. There were no defaults, but distressed activity involved significant amounts in bonds and loans, with the US high-yield default rate decreasing and leveraged loan default/distressed activity increasing. Default projections for 2024 remain steady.
Inflation, Renewable Energy, and AI Trends for 2024
Apr 2024
The market’s focus will remain on inflation readings, anticipating a rate cut for further gains. While China’s growth may push oil prices up, its exchange rate suggests it will export deflation globally. Domestically, companies like Starbucks indicate retail customers can no longer support price hikes, and rent increases are flattening. On renewable energy, a BNEF report shows 30% of global electricity was renewable in 2023, but Chinese export capacity and low prices present challenges. The market awaits President Biden’s decision on tariffs for Chinese EVs, solar, and batteries. In AI, significant developments continue, with experts believing we’re in the early stages. Key players in AI and the broader economy have compelling valuations and are expected to benefit in 2024.
Market Performance and Projections for Q2 2024
Apr 2024
Markets stumbled at the start of Q2 2024 as decent corporate earnings couldn’t offset diminishing hopes for multiple rate cuts. The VIX rose in April but dropped in early May. Equities fell, with major indices experiencing losses. Fixed income also slumped, while leveraged loans gained. The US Treasury yield curve inversion held steady, with short-term and long-term bond yields showing little change. Commodities performed well, with gains in indices, gold, copper, and natural gas, though WTI crude declined. US investment-grade bond issuance increased in April, and high-yield bond issuance saw tightening spreads. Leveraged loan issuance also increased with tighter spreads. High-yield fund flows saw outflows, while leveraged loans experienced inflows. Default and distressed activity moderated, with a drop in the US high-yield default rate and leveraged loan defaults reaching a yearly low. JP Morgan, Goldman Sachs, and Morgan Stanley provided various projections for 2024 default rates for high-yield bonds and leveraged loans.
Strong Bonds and Commodities
Mar 2024
Q1 2024 concluded positively across markets, buoyed by benign corporate news and renewed optimism for rate cuts following remarks from Fed Chair Powell. The VIX maintained multi-year lows, closing the quarter at 13. Equities showed robust growth, with notable rises in the NASDAQ, Russell 2000, and S&P 500. Fixed income markets also saw healthy gains across various indices, with leveraged loans and the S&P 500 leading their respective sectors. Strong macroeconomic indicators pushed the U.S. Treasury yield curve inversion to 42 basis points. Commodities generally performed well, with significant gains in the S&P GSCI, gold, copper, and WTI crude, although natural gas fell. Bond issuance was solid but slightly below average for March, with tightened spreads. High yield fund flows reversed after five months of gains, experiencing significant outflows, while leveraged loans continued to attract inflows. Default and distressed activity decreased in March, with a modest increase in the U.S. high yield default rate and a decline in leveraged loan distress. Projections for 2024 default rates remain steady according to JP Morgan, with slightly higher expectations from Goldman Sachs and Morgan Stanley.
AI Growth, Rate Cut Speculations, and China's Export Impact
Mar 2024
As the first quarter of 2024 earnings season begins, with Delta Airlines already reporting, market focus remains predominantly on the growth of generative AI and accelerated computing, the timing of potential interest rate cuts, the effects of China’s aggressive exports, and ongoing geopolitical tensions in Gaza and Ukraine. The expectation of the U.S. economy becoming a primary beneficiary of AI advancements raises concerns about whether U.S. utilities and Independent Power Producers can meet the energy demands of AI data centers. Recent CPI data has complicated predictions about interest rate cuts, reducing earlier expectations of up to six cuts to possibly one or two this year, due to persistent inflation. Additionally, China’s export push in sectors like electric vehicles, solar panels, and batteries poses challenges to similar nascent industries in the West, despite potential calls for protectionist measures. There is also a focus on value-driven opportunities in renewables, agriculture, media, and financial sectors, anticipating these areas to showcase strong performance in the near future.
Equities Up, Mixed Bonds, High Defaults
Feb 2024
In February, markets continued to exhibit a “risk on” attitude, bolstered by generally positive corporate earnings and softer inflation in the latter half of the month. The VIX dropped by 7%, stabilizing near post-pandemic lows, while major equity indices like the NASDAQ, Russell 2000, and S&P 500 saw substantial gains ranging from 5.3% to 6.2%. Fixed income performance was mixed, with the JPM indices showing varied returns. In commodities, the S&P GSCI, gold, and WTI crude posted modest increases, but natural gas and copper declined significantly. Bond markets saw robust activity with significant issuance in both investment grade and high yield sectors, though high yield fund flows dipped, contrasting with stronger leveraged loan market dynamics driven by ETF demand. February also marked a peak in distressed activity post-pandemic, with $6 billion in defaults, significantly impacting the U.S. high yield and leveraged loan default rates. Looking ahead, JP Morgan maintains its default rate projections for 2024 while adjusting its 2025 forecasts slightly upwards, in contrast to Goldman Sachs’ more conservative expectations for the year.
AI and Interest Rates: Driving Economic Trends
Feb 2024
The potential impact of AI on the economy and the timing of interest rate cuts are key drivers shaping risk appetite in 2024. AI continues as a dominant macro theme, with companies increasingly adopting generative AI for higher productivity. Conferences across sectors highlight this pivot towards AI, with a CEO noting that much of the AI work will be done in the US, leading to higher market multiples for US benchmarks. Despite expectations for interest rate cuts being pushed to the second half of the year, forward lower rates are seen as supportive of risk. However, concerns persist over the growing US deficit, with clarity expected after the fall Presidential election. China’s shift towards increasing manufacturing exports, especially in EVs, lithium, and solar panels, could pressure sectors globally. These trends are likely to influence market performance and economic outlook throughout the year.
Mixed Performance and Strong Bond Issuance
Jan 2024
January 2024 saw firm markets following a strong 2023, with mixed performance across different asset classes. The VIX increased by 15%, closing at 14, indicating stability near post-pandemic lows, while the NASDAQ and S&P 500 experienced modest gains of 1% and 1.7% respectively, and the Russell 2000 dropped by 3.9%. A significant part of the equity losses occurred on the last day of the month following Fed Chair Powell’s hint that a March rate cut was unlikely. Fixed income markets posted gains, with notable increases in various JPM indices. The U.S. Treasury yield curve inversion narrowed to 30 basis points. Commodity returns were mixed, with the S&P GSCI up by 3.6%, while natural gas and gold saw declines. The month was marked by robust bond issuance, particularly from the banking sector, and continued strength in ETF demand for high yield and leveraged loans. Default and distressed activity in the high yield and leveraged loan markets mirrored the 2023 averages, starting the year with low default rates, although projections from Goldman Sachs suggest higher default rates for the year.
Key Themes from Q4 Earnings Reports
Jan 2024
The fourth-quarter earnings reports of portfolio holdings and industry bellwethers suggest a shift in focus for 2024. Unlike in 2023, recession concerns have lessened, and attention is now on the timing of interest rate cuts, which is expected to support asset valuations. AI remains a dominant theme, with companies investing heavily in cloud and edge computing. China’s impact is significant, especially in commodities and the EV/auto sector, with concerns over the real estate sector’s broader impact on equity markets. The second wave of AI movers, including HBM memory, edge computing, broadband, foundry, and AI adapters, is expected to perform well in 2024. Additionally, value-oriented opportunities in renewables, agriculture, media, and financials are anticipated to show strong performance in the coming months.
Outlook for High Yield Bonds and Leveraged Loans in 2024
Dec 2023
2024 is expected to be a positive year for high yield bonds and leveraged loans, supported by the likely avoidance of a recession, a benign default outlook, and a favorable supply/demand backdrop. Economists predict the US economy to grow around 2% this year, avoiding a recession. In this modest growth environment, companies are expected to generate free cash flow to repay debt, benefiting high yield bonds and leveraged loans. Forecasts suggest default rates of 2.75% for high yield bonds and 3.25% for leveraged loans, consistent with long-term averages. Technical factors, such as reduced supply and declining interest rates, are expected to support spreads in 2024. The market’s pricing in of upcoming rate cuts is evident in the relative “cheapness” of leveraged loans compared to high yield bonds, due to their floating rate nature. Opportunities for outperformance exist by seeking 1st lien, fully secured bonds and loans, and better risk-adjusted opportunities in the BB space are being found. The healthcare and energy sectors are particularly attractive, with the healthcare sector expected to improve due to easing margin pressures and the energy sector benefiting from geopolitical tensions. Overall, high yield bonds and leveraged loans are positioned for a positive performance in 2024.
2024 Market Outlook and Sectoral Trends
Dec 2023
Looking ahead to 2024, the Bloomberg estimate for the S&P 500 performance is around 8%, with several factors influencing the outcome. Key drivers include the Federal Reserve’s policy rate trajectory, U.S. consumer sentiment, demand recovery in Europe, and the stabilization of China’s real estate sector. While 2024 may see weaker growth in the US and Europe, there is potential for a growth resurgence in the US when the Fed begins cutting rates. China may also rebound earlier in the year, which could bolster global growth. Secular trends, such as AI-related developments, are expected to be significant drivers. The “second wave” of AI technologies, including memory, edge computing, broadband, and foundry, are likely to see strong growth due to increasing demand and rising prices. Additionally, the renewable energy sector is expected to rebound, with companies like Siemens Energy poised for a strong year.
Global Economic Trends and Sectoral Dynamics
Nov 2023
The US is experiencing full employment with a gradually moderating inflation outlook, while China is grappling with rising interest rates and a struggling real estate sector, possibly leading to domestic deflation. Despite OPEC+’s efforts, oil prices are weaker than anticipated, influenced by US production and macroeconomic conditions. The US and Europe are expected to see weaker economic growth in 2024, while China may rebound after a slowdown in 2023. In the technology sector, prices are rising in areas such as memory and storage chips due to high demand from gen-AI and a China smartphone recovery. Additionally, there’s a shift towards decarbonization strategies in the energy and industrial chemical space.
Market Rally: Fed Boosts Gains
Nov 2023
Measured comments from Fed Chair Jerome Powell and softer inflation data boosted US risk markets in November. The VIX fell 29%, and the US 10-Year yield dropped to 4.32%. Equities surged, with the NASDAQ, S&P 500, and Russell 2000 returning 10.8%, 9.1%, and 9%. Fixed income markets saw gains, with the JPM JULI-IG, JPM US HY, and JPM Leveraged Loan indices up 5.7%, 4.6%, and 1.25%. The US 2-year and 10-year yields were 4.68% and 4.32%. Commodities declined, with the S&P GSCI down 3.7%, WTI crude down 6.25%, and natural gas down 21.6%, while copper and gold rose 4.9% and 2.2%. US IG and HY bond issuance rebounded, with $99 billion and $19.4 billion issued. HY and leveraged loan fund flows were strong, with HY inflows at $11.3 billion and leveraged loans at $900 million. Default and distressed activity matched 2023 averages, with the US HY default rate at 2.88% and leveraged loans at 3.08%. JP Morgan and Goldman Sachs project 2024 default rates for HY bonds and leveraged loans between 2.75%-5.2%.
Recent Economic and Sectoral Trends
Oct 2023
Recent data indicates a notable slowdown in the super-hot US labor market, attributed to the Federal Reserve’s high interest rates. The latest CPI numbers suggest near-term CPI data is at 0%, with core monthly CPI annualized at less than 2.5%, potentially negating the need for further policy rate increases and hinting at possible rate decreases in the future. The House approved legislation to fund the US government until early next year, avoiding a shutdown. Additionally, US productivity figures exceeded expectations, indicating the possibility of both growth and low inflation. The IEA forecasted an oil surplus in 2024, potentially due to lower demand driven by factors such as electric vehicle growth. At the sector level, generative AI emerged as a key development with wide impact, while overcapacity persisted in China’s industrial sectors. Higher interest rates affected industries like renewable energy, and GLP-1 drugs disrupted subsectors of the US healthcare ecosystem.
Fed Jitters Impact Performance
Oct 2023
Concerns over the Fed’s upcoming meeting, Treasury refinancings, and geopolitical tensions impacted US equity and fixed income performance in October. The VIX rose to 18.1, and equities saw declines with the NASDAQ, S&P 500, and Russell 2000 returning -2.8%, -2.1%, and -6.8%. Fixed income markets also fell, while leveraged loans remained stable. The US Treasury yield curve inversion narrowed, and the S&P GSCI dropped 5.4%. Solid earnings and a dovish Fed boosted markets in early November. US IG bond issuance was $85 billion, and HY bond issuance fell to $9.4 billion. Both HY and leveraged loan fund flows experienced outflows. Default and distressed activity increased, with 7 defaults and 2 distressed transactions in October. The US HY default rate rose to 2.6%, and leveraged loans ended Q3 at 3.08%. JP Morgan projects 2023 default rates for HY bonds and leveraged loans at 3% and 3.5%, with 2024 projections at 3.25% and 4%. Goldman Sachs forecasts 2024 HY and leveraged loan defaults at 3.5% and 5.2%.
Rising Rates, Cautious Consumers, and Mixed Flows
Sep 2023
In August, financial markets grappled with challenges such as rising interest rates and energy prices, fueled by concerns arising from corporate earnings reports including Dick’s Sporting Goods, Macy’s, Foot Locker, and Dollar General. This led to a 2% decline in the NASDAQ, a 1.6% drop in the S&P 500, and a 5% loss in the Russell 2000. While investment-grade issuance was $69 billion with slight spread widening, high-yield bond issuance remained light at $9 billion with a minor spread increase. Leveraged loan issuance, however, surged to $41 billion. Fund flows exhibited mixed trends, with high-yield outflows of $2 billion, and leveraged loans saw net inflows of $215 million. Default and distressed activity increased compared to July but remained below 2023 averages, impacting $6 billion in bonds and loans. Overall, August marked a challenging month for financial markets amid ongoing economic uncertainties.
Economic Snapshot:Nifty, GDP, and Bonds
Sep 2023
In August, the Nifty index experienced a 3.1% decrease in USD terms, primarily due to declines in the Energy (-5%), Financials (-4%), and Consumer Staples (-3%) sectors, while IT (+3%) and Industrials (+3%) sectors showed gains. India’s GDP for the first quarter of fiscal year 2024 grew by 7.8%, up from the 6.1% recorded in the fourth quarter of fiscal year 2023, driven by robust investment surpassing consumption. Additionally, GST collections remained strong, increasing by 10.5% year over year to reach INR 1.6tn. The 10-year G-Sec yield decreased by 3 basis points to 7.14%, resulting in a G-sec sector return of 0.4% for August, while spreads for AAA rated 10-year bonds increased by 2 basis points to 49 bps.